Port of Portland, Oregon Portland International Airport; Airport Primary Credit Analyst: Mary Ellen E Wriedt, San Francisco (1) 415-371-5027; maryellen.wriedt@standardandpoors.com Secondary Contact: Adam Torres, New York (1) 212-438-2481; adam.torres@standardandpoors.com Table Of Contents Rationale Outlook Bond Ordinance Provisions Airport Description Airport Finances Contingent Liquidity Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 25, 2014 1
Port of Portland, Oregon Portland International Airport; Airport Credit Profile US$96.18 mil rev bnds (Portland Intl Arpt) ser 22 due 07/01/2044 Long Term Rating AA-/Stable New Port of Portland, Oregon Portland Intl Arpt, Oregon Port of Portland (Portland International Airport) Long Term Rating AA-/Stable Affirmed Rationale Standard & Poor's Ratings Services assigned its 'AA-' long-term rating to the Port of Portland, Ore.'s $96.2 million series 22 general airport revenue bonds (GARBs), issued for the Portland International Airport (the airport or PDX). In addition, Standard & Poor's affirmed its 'AA-' rating on the airport's outstanding GARBs and its 'A' rating on the airport's passenger facility charge (PFC) bonds. The outlook on all ratings is stable. Although the airport serves mostly short- to medium-haul markets, it exhibits many fundamental strengths of larger hubs, in our view: a strong, primarily origination and destination (O&D) market, the absence of competing facilities, and solid historical debt service coverage (DSC). The ratings on the GARBs and the PFC bonds reflect our view of the following strengths: The predominantly O&D nature of passenger traffic and the airport's dominant market position in the region; The airport's strong to very strong liquidity position; The diversity of passenger airline carriers serving the airport; and The demonstrated strong management of operations, finances, capital projects, and administration of the PFC program. In our view, these credit strengths are partly offset by a significant but, in our opinion, manageable capital program of $895 million over the next seven years. The GARBs are secured by a senior lien on the net revenues of the airport only (no pledge of the port's other revenues), and the PFC bonds are secured by PFC revenues only. The airport collects the maximum $4.50 PFC. The airport currently has approximately $148 million in PFC bonds outstanding, including a direct purchase agreement with Wells Fargo. In addition, the airport currently has approximately $407 million in airport revenue bonds outstanding. The airport has entered into six swaps with a current notional value of $158 million, including $100 million of swap notional amount associated with GARBs, and $58 million of swap notional amount associated with the PFC revenue bonds. Passenger traffic growth at PDX has been strong in recent years, in our view, but exhibited some softness in fiscal WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 25, 2014 2
years 2009 and 2010 due to the economic recession. While enplanements reached 7.4 million in fiscal 2008, with the nationwide recession and the escalation in fuel costs, enplanements decreased by 10.7% in fiscal 2009 and an additional 2.7% in fiscal 2010 to a total of 6.5 million. Fiscal 2011 enplanements, however, increased by 4.2%, which we consider solid, to a total of 6.8 million. Enplanements continued to grow in fiscal 2012, increasing 2.9% to a total of 6.9 million. Enplanements grew a strong 5.6% in fiscal 2013 to 7.4 million, just below the peak enplanement level in fiscal 2008, then grew an impressive 5.8% to a record 7.8 million in fiscal 2014. Management is projecting enplanements will grow by a 2.0% compound annual growth rate (CAGR) through fiscal 2021 to a total of 8.9 million in fiscal 2021, which we consider to be aggressive but achievable. The port is a municipal corporation and a legal subdivision of the state that operates maritime, aviation, and industrial properties. The airport is located on 3,200 acres on the southern edge of the Columbia River, 12 miles northeast of downtown Portland. The airport is considered a large hub by the Federal Aviation Administration (FAA) as of calendar year 2013 enplaned passengers and was the 30th largest airport in the U.S. according to the FAA. Seattle-Tacoma International Airport is the closest major airport facility (160 miles to the north) and does not provide a viable alternative for air access to the Portland region. Outlook The stable outlook reflects our anticipation that financial metrics will meet or exceed management's projections, that airline cost per enplanement will be manageable, that the liquidity position will remain at least strong, and that limited additional debt will be needed to fund the capital improvement program (CIP). We would consider a significant decrease in traffic demand that puts pressure on these metrics as a credit risk. We do not expect to raise the ratings during the next two years given the capital plan and planned additional debt. Bond Ordinance Provisions The GARBs are secured by the net revenues of PDX and by the moneys held in certain funds and accounts established by the bond ordinances. The pledged revenues for the GARBs do not include other nonairport activities, such as maritime operations, under the port's control. Overall, the legal structure of the airport enterprise is favorable, in our opinion. While bond provisions regarding the flow of funds and debt service reserve levels are typical, we believe the airport has a strong additional bonds test of 1.30x, which may be calculated on either historical or projected net revenues. Under the bond ordinance, the airport has covenanted to impose rates and charges so that the annual net revenues are equal to 1.30x debt service; it also requires annual payment of DSC from the airlines rather than the industry's standard rolling coverage. While PFCs are legally defined as revenues, federal law restricts their use to specific, approved projects, and the airport does not use these revenues in the calculation of rates and charges and PFC Revenues are excluded from net revenues and not available for the payment of GARB debt service. Technically, the airport's GARBs were issued on a subordinate-lien basis; however, there is no other debt with a prior claim on airport revenues, and the port has covenanted to not incur any obligations other than operations and maintenance (O&M) expenses superior to the lien on the outstanding bonds. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 25, 2014 3
The PFC bonds are secured solely by PFC revenues and PFC revenue interest earnings. The airport may pledge additional revenues to the bonds though currently no additional revenues are pledged. The PFC is a $4.50 charge levied by the port on each "PFC-eligible" enplaned passenger, which is collected and remitted monthly by airlines serving the facility -- subject to an administrative fee of 11 cents on each PFC retained by the airline. By federal statute, there are certain classes of passengers that cannot be charged a PFC, including travelers using frequent-flier tickets. On a one-way flight, a passenger may be charged a PFC only at the first two airports where PFCs are collected. On a round-trip flight, a passenger may be charged a PFC only at the first two enplaning PFC-collecting airports on the outbound leg and the last two enplaning PFC-collecting airports on the inbound leg. In recent years, between 90% and 92% of enplaned passengers at PDX paid a PFC. The airport's PFC application no. 12 was approved in February 2013, which brought the authorized total of PFCs that may be imposed and used to more than $1 billion. The airport deposits PFC revenues as collected to the PFC fund, and applies the fund in the following order: to pay debt service on the PFC bonds, to make any required deposits to the reserve account, to make any subordinate-lien PFC obligation payments, to make any required deposits to a subordinate-lien PFC reserve account, and to deposit to the PFC Capital Account to be used for approved projects or any other use authorized under federal PFC regulations. Under the PFC bond ordinance, the port must, at all times, comply with a first-lien sufficiency covenant. Under this covenant, the following calculation must exceed 1.05x at all times: PFC Authority: Less: costs paid to date on PFC pay-as-you-go improvements Less: pay-as-you-go contractual commitments Less: debt service paid to date on PFC bonds Less: projected aggregate subordinate-lien debt service Plus: any funds on deposit in the subordinate-lien obligations account or reserve and any additional pledged revenues. Divided by: projected aggregate first-lien debt service, less funds on deposit in the first-lien debt service account and first-lien reserve fund. The airport may issue additional first-lien PFC bonds if an aviation consultant certifies that the first-lien sufficiency covenant will be met after the issuance, and projected pledged revenues for the five years after issuance provide at least 1.50x maximum annual debt service. Airport Description The airport is located on 3,200 acres on the southern edge of the Columbia River, 12 miles northeast of downtown Portland. The closest major airport facility is Seattle-Tacoma International Airport (160 miles to the north), which does not provide a viable alternative for air access to the Portland region. The only other commercial service airports in the state are smaller airports at least 100 highway miles away. The airport has two parallel east/west runways and one northeast/southwest crosswind runway. The passenger terminal includes five attached concourses. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 25, 2014 4
Portland has a solid market position, in our opinion. Historically, Portland experienced steady growth in passenger traffic. From fiscal years 1990 to 2000, passenger traffic at Portland increased at an average annual rate of 8.3%. The airport experienced high growth between fiscal years 1993 and 1997, with an average increase of 13.3% per year, stemming from the addition of Southwest Airlines to the airport in fiscal 1994. However, between fiscal years 2000 and 2002, the number of enplanements decreased, due in part to the effects of Sept. 11, 2001; the national economic downturn, which affected the Portland region; and the withdrawal of international service by Delta in 2001. During this period, the number of enplaned passengers decreased by 1.7% in fiscal 2001 and 10.8% in fiscal 2002 to 6.0 million passengers. From fiscal 2002 through fiscal 2008, enplanements steadily increased (including 6.6% growth in fiscal 2005 alone) at a CAGR of 3.5%. New service at the airport and the presence of low-cost carriers contributed to the growth. In fiscal 2008 enplanements reached their historical high of 7.4 million, a 4.3% increase over the previous record of 7.1 million in fiscal 2007. Due to the effects of the national economic recession and increased oil prices on airline capacity, however, enplanements decreased by 10.7% in fiscal 2009 to 6.7 million and by an additional 2.7% in fiscal 2010 to 6.5 million. In fiscal 2011 enplanements began to recover, growing by 4.2% to a total of 6.8 million, and in fiscal 2012 they increased by 2.9% to a total of 6.9 million. In fiscal 2013 the airport experienced strong growth of 5.6% to 7.3 million, just below the historical peak in traffic in fiscal 2008, then in fiscal 2014 enplanements reached a new record high, growing 5.7% to 7.8 million. The overall CAGR from fiscal 2004 to 2014 was 2.1%. From fiscal 2015 through fiscal 2021, management projects annual growth of 2.0%. The growth is based on historical trends in aviation activity at the airport, airline announcements, and local socioeconomic and demographic factors. The airport is an O&D facility, with 84% of passenger traffic initiating or concluding travel at the airport in CY2013. Most of that traffic is domestic. The O&D market base mitigates some risks regarding air carrier hubbing decisions, in our view, but travel demand is susceptible to fluctuations in the local economy. As of July 2014, scheduled passenger service was provided by 16 airlines (including regional carriers), in addition to scheduled cargo service. There is some concentration in Alaska Air Group, at 40.5% in fiscal 2014 (including Horizon Airlines). The second-largest carrier in fiscal 2014 was Southwest, at 16.6%, and the third largest was United, with 13.8%. Airport Finances Airport operating revenues have fluctuated with passenger traffic during the past few years, with audited fiscal 2013 revenues totaling $187 million, up 3% from fiscal 2012. O&M expenses totaled $101 million. (Fiscal 2014 financials have not yet been audited.) Net revenues have provided good historical GARB DSC, in our view, at 1.8x in fiscal 2013. Management took steps to mitigate the financial impact of the decrease in traffic in fiscal years 2009 and 2010, including lowering operating expenses and raising certain revenues, with DSC dropping only to 1.7x in fiscal 2011, which was the lowest point in 10 years. Unaudited fiscal 2014 GARB DSC is expected to be 1.9x. GARB DSC is forecast by management conservatively to range from a high of 1.9x in fiscal 2019 to a low of 1.8x in fiscal 2021 through the forecast period. These projections are in line with management's previous forecasts. We consider the historical DSC levels at the airport to be good, particularly as the calculation does not include rolling coverage. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 25, 2014 5
PFC revenues collected by the airport have provided, in our view, strong DSC, ranging from a high of 5.6x in fiscal 2000 to a low of 2.1x in fiscal 2012. PFC revenues jumped 19.2% in fiscal 2002 after the PFC charged to passengers increased to $4.50 from $3.00. Since that time, growth in PFC revenues has followed enplanement growth. In fiscal 2009, PFC revenues earned totaled approximately $26 million, providing 2.5x DSC on the PFC bonds, and DSC remained at 2.5x for fiscal years 2010 and 2011. PFC DSC was 2.01x for fiscal 2012, 2.2 for fiscal 2013, and estimated to be 2.3x for unaudited fiscal 2014. Forecast PFC DSC for fiscal 2015 is 2.3x. The airport's liquidity for unaudited fiscal 2014 was very strong, in our opinion, at $256 million, or 859 days' cash on hand, representing 52% of GARBs outstanding. This figure includes the airport's and the port's unrestricted cash and investments divided by airport operating expenses per day. Unaudited fiscal 2014 days' cash on hand is 859. Liquidity has been consistently high, in our opinion, and was 756 days in fiscal 2009, 883 days in fiscal 2010, 1,061 days in fiscal 2011, and 885 days in fiscal 2012. Management has worked effectively to lower the cost per enplanement. Cost per enplanement was $10.34 in fiscal 2013 and $10.39 in unaudited fiscal 2014. It is budgeted by management at a moderate $9.98 in fiscal 2015 and then forecasted to increasesteadily in each year to a high of $13.89 in fiscal 2021. Historically, the cost per enplanement at PDX had been moderately high, in our opinion, at $11.88 in fiscal 2009 and $12.02 in fiscal 2010. Debt per enplanement is low at $71 including $52 for GARB debt and $19 for PFC debt) for unaudited fiscal 2014. The airline agreement was effective July 1, 2010, and set to expire June 30, 2015; however, management and the airlines have agreed to extend the term of the agreement through 2025. The agreement has a hybrid rate-making model, with residual rate-making for the airline cost center covering O&M expense plus 1.3x annual funded DSC. The agreement has a majority-in-interest disapproval process for airline cost center projects, exceeding $1 million in project cost, and includes a provision for revenue-sharing of nonairline revenues of up to $6 million per year (plus additional revenue sharing if the airport DSC exceeds 1.75x). The seven-year CIP totals $895 million, which we consider significant but manageable. We understand that management plans to issue approximately $223 million in additional proceeds with GARBs in addition to the $92 million in proceeds from the series 22 bonds. The additional debt has been incorporated into management's financial forecast discussed above. Other sources of funds are federal and state grants ($120 million), PFC funds ($141 million), and port funds ($320 million). Projects include facility expansion, terminal rehabilitation, infrastructure, security improvements and regulatory compliance. Contingent Liquidity The airport has six swaps with three counterparties outstanding. The combined current notional value of these swaps is approximately $158 million. We consider the risk exposure low given the rating differential between airport's rating level and the rating triggers for collateral posting and termination. In addition, the airport has a direct purchase agreement for $57.7 million with Wells Fargo Municipal Capital Strategies, LLC. The direct purchase agreement is for the series 2012A PFC bonds. We consider the contingent liquidity risks to be low given the airport's strong financial margins and liquidity. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 25, 2014 6
Related Criteria And Research Related Criteria Criteria: Airport Revenue Bonds In The U.S. And Canada, Nov. 15, 2013 USPF Criteria: Stand-Alone Passenger Facility Charge Debt, June 13, 2007 USPF Criteria: Contingent Liquidity Risks, March 5, 2012 Ratings Detail (As Of August 25, 2014) Port of Portland, Oregon Portland Intl Arpt, Oregon Port of Portland (Portland Intl Arpt) passenger fac chg rev bnds Long Term Rating A/Stable Affirmed WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 25, 2014 7
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